Megaport Limited: To $100m and beyond

About the author:

Nick Harris
Author name:
By Nick Harris
Job title:
Senior Analyst
Date posted:
25 October 2021, 7:00 AM
Sectors Covered:
Telecommunications, Technology

  • MP1 reported another strong quarter with record Annualised Recurring Revenue added (+$10M ARR added in the quarter on a constant currency basis and +$13m ARR in A$/currency assisted).
  • MP1 has achieved a major milestone which is ARR exceeding $100m in Q1FY22. This is a challenging number to crack and has been achieved predominately with direct sales. With a huge amount of work going into MP1’s product, engineering and commercial offering, we are hopeful sales accelerate from Q3 and beyond, as MP1’s indirect/channel partners/MVE sales begin to kick.
  • We retain our Hold and (login to view) target price for now, hoping to buy on a pullback.

Event: Q1 FY22

Revenue growth and costs were both ahead of our expectations. Monthly Recurring Revenue (MRR) added in the quarter was a record on an underlying basis (ignoring currency) as well as in AUD terms (AUD terms were helped by currency movements this quarter).

Underlying MRR growth in the quarter was +$822k/$8.5m which takes ARR to $103m. We were expecting MP1 to crack the $100m ARR mark in Q2FY22 so this is a great outcome, in our view.

A large portion of MP1’s revenue growth in Q1 was cycling the full impact of record customer and port adds in Q4FY21. In Q1 ports, customers and services added slowed QoQ which means sales need to convert early in Q2 to deliver a strong Q2. 

We are focused on Q3 where we expect to see a meaningful lift in channel sales.

Analysis

At first glance cash costs were higher than we had expected but this is all timing related; and we are comfortable our FY22 costs are still in the ballpark.

There are ~$7m of quasi one-off cash costs in Q1 FY22 which will not repeat in the next few quarters. These include payment of commission and Short-Term-Incentives (carried over from FY21), upfront license fees (annualised cost which are paid in Q1) and one-off deals costs relating to the acquisition of InnovoEdge.

There were also some timing benefits in Q4FY21 which reversed in Q1FY22 (MP1 paid suppliers in Q1FY22). Overall, backing those out suggests FY22 expenses remain in the ballpark of $110m per annum.

In August, MP1 flagged it would increase investment in sales and marketing costs, so it doesn’t come as a surprise that operating costs have jumped. MP1 delivered negative operating cashflow for the quarter (despite exiting FY21 in an EBITDA/Ops cashflow positive position).

On the capex side, MP1 sealed the acquisition of InnovoEdge (-A$10m in Q1) and purchased equipment early to sensibly compensate for chip related shortages.

Forecast and valuation update

No changes made.

Investment view

Hold recommendation and (login to view) Target Price retained.

We continue to be long-term bulls on MP1. We view its business model, structure growth, and managements execution all as exceptional. However, we are hoping a short-term buying opportunity may present itself over the next twelve months.

Price catalysts

Key share price drivers will be data points supporting an acceleration in sales in FY22 and proving there is healthy customer demand for MVE.

This anticipated acceleration in sales is expected from Q3 FY22 onwards and should, in our view, be sufficient to more than offset negative EBITDA in 1H22 (investing for growth).

Risks

MP1 is not yet a cash generative business and needs to grow revenue to reach this point. With $114m of cash at bank (31 Sept 2021), MP1 has ample runway.

MP1 is a high-growth business and as such is subject to significant share price volatility. This includes a valuation highly sensitive to bond yields and inflation.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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